Vodafone India’s Broadband Silver Lining

The day after announcing it is going to spend $11.1 billion to buy its way into one of the fastest growing wireless markets, Vodafone is getting a bit of a reality check. Moody’s Investor Service is contemplating cutting its bond ratings on the telecom giant, citing that risks outweigh the benefits of this money. There is a silver lining, and it is called broadband.

Vodafone can diversify into fixed line telephony, and start offering broadband (ADSL2+) services to the Hutch-Essar subscriber base, given their skew towards the upper crust of the telephony market. It can also help boost the ARPU from current $8 or so a month. Offering broadband, and then bundling it with a Wi-Fi-enabled residential gateway that can also support voice services.

By offering higher speeds – not a difficult task, the best you can get is 2 megabits per second (with limits) – and bundling it with a flat rate calling plan from home, it can prove to be quite attractive to price sensitive customers. Actually, chasing this converged services strategy isn’t new to Vodafone. The company has been rolling out fixed line services like broadband in Germany, and has also partnered with BT in UK.

The company can work with other incumbents and lease lines or even build its own infrastructure. Surely, the wireline roll out in major metros is going to cost a lot less than the 3G build out. Hutch Essar doesn’t have wireline operations as of now, so Vodafone has a chance to start with a clean slate, and raise the bar by offering higher speeds and competitively priced bundles.

The key to Vodafone making a go of it is the availability of the dual mode phones. Given that I have seen many Indians walking around with Nokia N-Series phones, there seems to be willingness to spend on premium handsets. Nokia is a pretty strong brand here, and has thoroughly thrashed Motorola and others. Still for the strategy to be successful, there needs to be availability of dual mode phones that are in the $75-to-$100 price range.

The best part, the company has time on its side. In a chat with senior investment professionals, it was noted that the Indian economic boom started with telephony, spread to food, clothing, white goods, and transportation, and more recently to real estate, as reflected by the hot housing market.

The next phase would see many spend their disposable incomes on stuff for the home, like flat screen (or larger) televisions, and personal computers.

If the Indian economy continues to grow at its recent scorching speed, then 2008 is the year one should expect PC sales to boom in the country. Corporate buying has driven PC sales in recent months. Some forecasts estimate that PC sales will be around 6.5 million for the financial year 2006-2007. As PC sales start to ramp up the Internet penetration, and demand for broadband is also going to go up.

Though the Indian government had declared 2007 the Year of the Broadband, they might be a year too soon. And that’s just the kind of breathing Vodafone might need to get into the broadband business.